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Saturday, February 23, 2013

Austerity and Alberta

Austerity

Austerity aims to use harsh measures – tax
increases, mass unemployment, reduction in public services, cuts to support for
the poor and needy – so as to bring “balance” to the relationship between
Government spending and government revenue. It is generally pursued due to the
understanding by some that the debt : GDP ratio and level of annual deficit for
Government is too high. Such “austerians”
are committed to balanced or near balanced budgets and to the idea of small
governments and the efficiency of markets.

Austerians tend also to be committed to
what is known as “trickle down” economics – lowering taxes on the rich and
corporations, since doing so enables them to invest in an economy and stimulate
growth. They also believe in using austerity to trigger “confidence” amongst
investors in the economy and its firms.

The
Problem with Austerity

Austerity tends to increase unemployment
and, by doing so, lower tax revenues for government. High unemployment and a
government unable to meet budget targets because of lower than expected
revenues leads to a lowering of investment, protests by citizens and a lowering
of market expectations and confidence. This in turn leads to a lowering of
spending on goods and services, which further reduces economic activity, tax
revenues and growth. Governments generally miss targets, as can be seen in the
case of the UK, Greece, Spain, France, Ireland and Portugal. This sometimes
leads rating agencies to lower their ratings of Government bonds, which further
adds to economic pressure and increases the need for austerity in the eyes of
austerians. At the present time, only Canada and Germany has maintained the
highest possible rating by all of the bond rating agencies.

The second problem with austerity is that
it leads to massive unemployment. This is both a moral issue – how can
government take actions which knowingly increase inequality, poverty and
misery? – and an economic one. The higher the level of unemployment the lower
the demand for goods and services. This is a vicious cycle, triggered by
austerity. In Europe at this time, there are some 20 million unemployed and
many young people aged between 18 and 24 have no realistic prospect of
employment and have been unemployed for two years or more.

The third problem is the unintended
consequences of austerity measures. For example, major cuts in capital
expenditure on roads, bridges, schools, hospitals and infrastructure leads to
major infrastructure deficits, overcrowding in schools and hospitals and lower
educational performance and health outcomes, lowering the attractiveness of the
social infrastructure. In the US at this time, a large number of bridges are so
fragile that they may soon be declared unsafe.

Another example is that of wage freezes.
When Britain imposed wage freezes on all workers during the Callaghan era,
employers used “perks” (cars, vacation time, benefits packages and pension
deals) to attract and retain workers. When the wage freeze ended some time
later, these “perks” were embedded and workers now sought to “catch up” wages
“lost” during the freeze. This led to inflation and the lack of competitiveness
of many sectors of the UK economy. A temporary austerity fix led to long term
challenges for employers and industry.

A related problem is that there is no
compelling evidence that trickle down economics works. Lowering taxes on the
rich so as to encourage investment simply means that they are richer and they
will find more places to stash their cash which they don’t have to invest.

The final problem with austerity is that it
doesn’t work. Greece is no nearer to being a stable, vibrant economy than it
was before the EU bail-out and austerity measures. Neither is Spain or
Portugal. The UK is probably the leading example of austerity as a failed
strategy.

An Alternative
to Austerity

The Keynsian approach to the recessionary
forces at play at this time is not to cut public spending, but to increase it
in focused ways so as to stimulate demand. Focused public spending on
infrastructure and needed long term investments – education, for example, but
also science, technology and innovation – leads to a growth in economic
activity, employment and demand for goods and services. This in turn creates
employment which increases tax revenues, in corporate taxes, in sales taxes and
income taxes. If non future focused spending patterns are adjusted and
lowered – holding the growth of spending on health, for example – occur at
the same time, then balance can be restored.

There is also no such thing as the
“confidence fairy”, as the Nobel prize winning economists Paul Krugman likes to
point out. Markets do what markets do and their behaviour is rarely a rational
response to public policy, evidence or the strategic intentions of firms or
governments. Psychologists can better explain herd behaviour.

So…

As Alberta looks at austerity as its only
strategy for its future, we should challenge the Government to explain its
assumptions about consequences and to state the risks of this strategy and
explain why they have rules out alternatives. Don’t hold your breath.

1 comment:

Bill Hunter
said...

From Forbes - Government Austerity: The Good, Bad And Ugly!

They say that good austerity, which comes in the form of spending cuts, which quite literally force policymakers to transfer fewer resources to those they favor. Politically this is very difficult, but the real argument against it is economic.

I believe in preventive austerity - follow the business plan, not reactive austerity!

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I am still working after leaving the world of the University and the Corporate work - consulting, publishing, writing. Owner of futureTHINK Press and author of 40+ books and operating a modest but very successful consulting practice focused on change and innovation.